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Under Armour is coming off a disappointing fourth-quarter earnings report, and investors are interested to see how the company’s largest market segment is faring.

Sports-apparel retailer Under Armour(NYSE:UA)(NYSE:UAA) is set to report first-quarter earnings Thursday, April 27, before the market opens. Investors are still reeling from the company's weaker-than-expected fourth-quarter report that dropped the stock more than 20% in one day and has culminated in an almost 60% decline over the past year.

Under Amour has projected lower revenue growth for 2017 and "mid-single-digit" growth in the first quarter. Stability in its largest geography-channel combination, North American wholesale, is critical for the company to buy time to implement its plans to disrupt retail and become less dependent on brick-and-mortar retailers. Let's review, then, what the company has forecast for 2017, along with signs of the stability investors should watch for.

Image source: Under Armour company website.

Dependence on North American wholesale

Under Armour has been growing international and direct-to-consumer segments aggressively, with five-year compound annual growth rates of 53% and 31%, respectively. While these segments deliver impressive growth, the company is still heavily dependent on its North American wholesale business. The following charts show the disproportionate size of this geography and channel.

Image source: Author's chart from Under Armour's 2016 10-K.

Under Armour defines the wholesale channel as sales through "national and regional sporting-goods chains, independent and specialty retailers, department-store chains, institutional athletic departments, and leagues and teams." But this channel doesn't represent all of Under Armour's brick-and-mortar retail presence, as the company's direct-to-consumer segment includes sales through the Under Armour branded stores and its websites globally. Ideally, I would like to see how these segments are doing just in the North American market, but Under Armour doesn't provide that detail.

Management expects lower revenue in 2017

The fourth quarter was an unexpected drag for investors on the revenue growth for this sports-apparel retailer. The following chart compares 2016 full-year performance to the fourth quarter and the projections for the upcoming year.

Metric

2016

Q4-2016

2017 Guidance

Overall revenue growth

22%

12%

10%-12%

North American revenue growth

19%

5%

none provided

Wholesale revenue growth

16%

6%

none provided

Author's chart from Under Armour's filings.

Under Armour's estimate of 10%-12% overall revenue growth for 2017 is significantly lower than what investors have become accustomed to. Last quarter, the company ended its streak of 26 consecutive quarters of 20%-plus revenue growth.

While Under Amour management didn't give revenue guidance for the first quarter, Dave Bergman, senior vice president of corporate finance and acting chief financial officer, provided some color on the last earnings call regarding what he expects for Q1, "We anticipate the first quarter to grow at a mid-single-digit rate as fourth-quarter conditions in North America carry over and will have not yet lapsed some of the significant bankruptcies we saw in 2016."

Management went on to say that revenue for the wholesale segment will be further affected by "pressure" from a "promotional environment" in retail that will carry over into this quarter's results. These concerns from management lead me to be more focused on watching the results from this part of the business.

What I'm watching

While the international and direct-to-consumer businesses offer growth for Under Armour going forward, CEO Kevin Plank reminded investors that North American apparel is still the company's "largest and most profitable business by far." I'll be watching to see signs that this business is remaining stable despite numerous retail brick-and-mortar store closures. Flat revenue growth to less than a 5% year-over-year decrease in the North American geography and the wholesale business would indicate stability.

Dick's Sporting Goods is Under Armour's largest wholesale partner, providing 10% of UA's 2016 revenue, and could set the tone for the health of this segment for the company. A positive note is that Dick's has plans to open more stores in 2017. In addition, Under Armour has a partnership with Kohl's which began in March and is expected to offset the impact of lost revenue from the Sports Authority bankruptcy.

Investor focus for this quarter's report will be on the growth numbers for the North American geography and the wholesale segment, I'll also be watching for any management comments related to traffic at Dick's, North American retail stores in general, or early indications of successes with the Kohl's partnership.

Under Armour is coming off a tough comparison against last year's first-quarter revenue growth of 30%, driven by a 28% gain in the wholesale business over the previous year. For Under Armour to meet investors' expectations of "mid-single-digit" growth for the company this quarter, North American consumers need to trek to their local retailer and buy some UA-branded apparel. I'll be watching for signs that they're doing that.

Brian Withers owns shares of Under Armour (A Shares) and Under Armour (C Shares). The Motley Fool owns shares of and recommends Under Armour (A Shares) and Under Armour (C Shares). The Motley Fool has a disclosure policy.

Author

Brian Withers has been a Fool since 2004 and loves to invest in solid companies that are changing the status quo and holding for the long term. Brian has been a member guide on the Fool One service since 2013. Brian's best investment has been investing in Foolish stocks with his kids since they were the young age of 5 & 7. That's 30 years earlier than he started with the Fool. When Brian is not working or writing for the Fool, you can find Brian riding his bike around central New Jersey. You can reach Brian via email: bwithbike@gmail.com.